In most group endeavors, leaders and participants want to know how effective they have been. Traditional financial statements and costing schedules are wrap-up reports; that is they offer information only after the job is finished. To correct errors after receiving this information, often the work has to be redone. This paper looks at monitoring the health of the enterprise much earlier in the process so that corrective processes can occur on a more timely basis and thus not only minimize errors and reduce costs but also lead to higher levels of achievement.
- Levels of Company Activity
In any company, enterprise or human endeavor there are three general levels of activity: Input, Production and Output. Something has to flow into the company such as raw materials (input), be rearranged, manufactured or produced (production), in order to provide a final deliverable or service (output) for the clients. Below, we call them A, B and C.
A B C
Input Production Output
A: Input consists of all the inflow to a company before any production takes place. Included therefore will be:
- Raw materials and supplies
- Building and facilities
- People-handling infrastructures (training, staff development)
B: Production consists of taking the steps to assemble and integrate all the inputs to produce the product or service that the enterprise is set up to deliver. Production includes:
- Preparing reports, studies and data for clients
- Putting together sub components and subsystems
- Assembling products to a final form
- Testing products for acceptance
C: Output reflects the final results of the enterprise and consists of:
- Final product for delivery
- Final service, report or study
- Financial results
- Company growth
- Company reputation
- Usual Methods of Monitoring Company Performance
Three tools that are commonly used to monitor how an enterprise performs are:
- Financial Statements
- Project Costing
- Responsibility Statements
- Financial Statements
Every company monitors its effectiveness at the output, namely profits or perhaps sales growth. These evolve directly from the P & L (profit and loss) financial statements, composed as they are of all the lowest level inputs, expenses on one side and invoices issued on the other. It is the composite of tiny bits of information collected by a chosen means including cost of paper clips purchased or income from paper clips sold. Every company assembles this type of information. Usually it is delivered monthly, specified delivery being so many working days after month-end. The financial statements give a clear picture of all the results, bypassing reasons, excuses, surprise opportunities or unexpected disasters – just the hard cold facts.
Since financial statements happen at the end of the process, they are represented by box C below. That is, the output of the entire company’s being can be viewed by the profits achieved. Another example of an output at box C is how the company may be viewed by the outside world, based on its impact on society, the nature and viability of the products it has developed and its relationship with the community. So too, company growth is an output of the organization’s endeavors. Project costing is an output too.
A B C
Input Production Output
While financial statements are extremely valuable to assess what has actually transpired, because they occur as an output (C), they are too late for timely correction to any performance error. Events that may be going wrong or awry during the process may not be annunciated until the financial statements point to some sort of shortfall. Obviously it is far better to find the error in stages A and B of the process. In fact this rear-end view of performance (C) is responsible for one of the common characteristics of a company in decline: financial departments become more important than sales, customer service or production departments – the tail starts wagging the dog. (See Reference 1) Rear-view evaluations promote attempts to correct budget variances by top-down force rather than bottom-up evolution. The top-down style of correction is usually doomed to failure.
2. Project Costing
Project costing allows major endeavors to be tracked by their financial effectiveness. Such reporting answers the question of: “What has it really cost us to make this product?” Project costing includes not only direct material and labor expenses but also overheads throughout the company that must be applied to each product according to an agreed-upon formula or allocation. At the end we know that product X which sells for $19.95 actually costs us $18.00 to produce, offering us a real profit of $1.95 per unit, for example. Thus, project costing reports would be categorized as belonging to Box C. (As a project develops, cost reports at agreed upon stages, benchmarks or gates may give us a warning of excessive costs; so such monitoring can also be categorized as belonging to Box B.)
3. Responsibility Statements
As posited by many experts and as covered in some of our own workbooks and manuals, Planning for Profits and Feeding the Structure, (References 2 and 1) financial statements should be designed to report results only to the level in the company of the manager who controls the numbers that make them up. That is, these statements, called ‘responsibility statements’ here, should be free of overhead or other allocations so that the search for the person who has accepted the relevant responsibility is identified. Thus the causes, the real reasons for excesses or shortfall can be isolated. They are based on the premise that no one should be held accountable for numbers over which they have no control (such as allocated numbers). It is simply a case of matching authority to responsibility (see Reference 3). While ‘responsibility statements’ are useful for isolating true responsibilities, they contain mostly results-after-the-fact information and thus reside in box C above. Well done, responsibility statements can be progress reports and so, might, at times, also be viewed as falling into the box B category.
- New Methods of Monitoring
A timely system of monitoring has been developed and can introduce data within a day of the occurrence of an event by the installation of the Accountability System (reference 3) described in details in Feeding the Structure (Reference 1).
Briefly speaking, the Accountability System monitors the performance of each employee, capturing 80% of the job constituents, focusing on the effectiveness of the job, namely of the employee delivering results that someone else wants or needs. Such a continuous monitoring system not only encourages and rewards employees to strive to new heights of personal achievement, but results in the employees raising their own bars of performance.
The Accountability System works right into the company processes and so, provides information at level B, creating an earlier-warning system of company performance. The System is classified as a B because it focuses on results of an individual, and most individuals in the company usually are part of the Production processes. The power of the Accountability System cannot be underestimated for it can harness the personal ambitions of the entire company’s employee contingent. As will be shown later, the Accountability System also provides information to lesser extent at level A. However, for the moment, we will view the Accountability at its point of major influence, box B.
A B C
Input Production Output
- Monitoring the Inputs
To catch problems before they become production headaches (B), and especially before they become resulting statistics (C), monitoring of the company’s performance has to take place earlier, namely, the company’s pulse must be monitored at A – at the Input phase for trends, tendencies or smoke signals.
A B C
Input Production Output
The parameters that can be measured early are:
Balance of Authority and Responsibility
Balance of Control and Flexibility
Balance of Efficiency and Effectiveness
Balance of Short Term and Long Term
We will only attempt to describe the first one at this time. Descriptions of the other monitors are available from the reference documents listed at the end of this paper. There is yet another early monitor parameter, Balance of PAVF. Its rather complex explanation and description is also deferred to the reference documents.
- Balance of Authority and Responsibility
Within our scale of definitions Task, Job and Responsibility are synonymous. (See Reference 4) Thus Authority must be balanced with the Task assigned, i.e. Authority with the Responsibility, or Authority with the Job Definition.
A major premise within the Accountability System is that Authority is defined with each Task. If properly carried out the Accountability System will assure that throughout the company, the Authority not only fits the Task, it matches the Task. Thus Authority is in balance with Responsibility. Two of a series of tests that we apply are:
A simple test company-wide of authority vs. task is done with these questions, posed during the quarterly employee review:
a) Do you feel that you have been given sufficient authority to handle the tasks assigned to you?
b) If not, what further authority do you need?
An answer at this point of ‘I don’t feel I have enough authority’ is the trigger for your supervisor to either give you more authority or justify why that requested authority is not being passed to you.
c) Do you accept your supervisor’s explanation of the authority assigned to you?
That is, you do not need to agree with the supervisor’s choice, but accept that the supervisor has made a ‘reasonable’ choice that the supervisor wants to maintain.
Any ‘yes’ to the above, is an adequate response. The company keeps an ongoing count of the ‘yes’ statements department-wide and then company-wide. An 80% ‘yes’ rate or above usually indicates satisfactory authority-responsibility relationships in the company. It also sets the level from which to improve, even at 80%. (A “No”, of course doesn’t get scored.)
The questions above are embedded in the CCCC Employee Self-Appraisal form of the Feeding the Structure manual, question 17. (Certain public presentations of this paper, but not this newsletter, will have the form reproduced as Appendix A.)
While not a common feature of most companies, mature organizations do set up and benefit from a problem-management council. (See Reference 5) This group meets monthly with a mandate to delegate authority to specific problem-solving teams. The teams do not begin to tackle the problem before them until the authority is sufficient to allow the team to work on the problem. Nor will it begin until there is sufficient authority for the group alone to be satisfied with the solution. As you can appreciate, the front-end part of ensuring that sufficient authority resides within the team is a demanding exercise. Because the CEO does not want to sit on every problem-solving team, the company quickly learns to apply the appropriate rules of delegation without losing management’s effectiveness.
The magnitude of this authority assignment is huge – what company doesn’t have lots of problems to address? In such a scenario the regular meeting of the problem management council is able to assess each month how much authority has been effectively delegated.
Typically Test 1 reaches all employee each quarter delving into every corner of the enterprise. (It actually occurs more frequently than that, but its lengthy explanation resides in Reference 3.)
Test 2, while it gets summarized monthly, is actually occurring many times each week.
In each case the measures are easy to effect, to gather and to report. What is not so easy, is to change the corporate attitude or climate – one that sets up the openness within the enterprise which permits these kinds of measurement systems.
Since there are four other measures possible at Box A as noted in paragraph 4, above, a constant inflow of early-warning information is assured that lead to timely corrections.